Introducing 'Drawdown'
40
NeighborhoodNews
Inside North Ranch
March
Financial
fitness
By Rocky Mills, North Ranch Resident
How To Measure Stock Market Pain: INTRODUCING “DRAWDOWN”
Have you ever had a “painful” experience in the stock market? Perhaps you owned tech stocks at the dawn of the new millennium. As The Impact of Losses chart at the right shows, the tech-heavy NASDAQ fell 78% in 2000-02. Or maybe you held stocks during the Great Recession of 2007-09, when the S&P 500 fell 57% from peak to trough.
The chart below shows the drawdowns of the S&P 500 for the last 50 years.
We call these big pain points “drawdowns”. A drawdown measures the largest loss, from high to low. It’s easy to calculate. Let’s say your account showed a high value of $2.0 million on your November 2007 statement. In February of 2009, your statement showed the account was then worth only $1.0 million. That’s a 50% drawdown.
Stocks can be good*
*except in down markets
I have such a plan. Your exposure to stocks is adjusted as market conditions dictate: Just data, no emotions. It’s a plan designed for millionaires who don’t want to become thousandaires — financially successful folks like you who enjoy their current lifestyle and want to keep it.
Measuring the drawdown is only the beginning. You then want to calculate what it would take to recoup your losses after such a drawdown. In the example above where the account dropped from $2.0 million to $1.0 million, we need to know what it would take to get back to the $2.0 million level. That’s simple – it would take a $1.0 million gain. From a starting value (after the drawdown) of $1.0 million, that translates into needing a “gain percent” of 100%.
My family and I have been in the neighborhood for over 30 years. My office has been at the corner of Westlake & Thousand Oaks boulevards for ages — we’re just down the block.
The “Impact of Losses” chart shows what it takes to recoup from various sized losses.
Of course – everyone knows that. But if this is such common knowledge, how many investors (or their advisors) have a plan that seeks to lower stock exposure during down markets?
Robert A. "Rocky" Mills is a registered representative with and securities offered through LPLLet’s Financial, Member FINRA/SIPC. Investment advice Let’s talk. make sure you have a plan. offered through Westlake Investment Advisors, a registered investment advisor and separate entity from LPL Financial.
Robert A. “Rocky” Mills
Vice general President information only and are The opinions voiced in this material Senior are for Financial Advisor not intended to provide specific advice or recommendations for any individual. Portfolio Management Director All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and mayMorgan not beStanley invested into directly. Investing 100 North Westlake Boulevard, Suite 200 involves risks, including loss of principal. Westlake Village, CA 91362 805-374-8118 [email protected] www.morganstanleyFA.com/rocky.mills
The strategiesand/or investments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. ©2015 Morgan Stanley Smith Barney LLC. Member SIPC CRC 1149798 3/15
What becomes apparent is that the “Gain Percent” rises exponentially as the “Loss Percent” increases. Bottom line: you need a system in place to avoid large losses. You can likely recover from small losses, but large losses are what really thwart long-term growth. Robert A. “Rocky” Mills is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Westlake Village. The information contained in this article is not a solicitation. Investing involves risks. The views expressed herein may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.
NeighborhoodNews
Inside North Ranch
March
Financial
fitness
By Rocky Mills, North Ranch Resident
How To Measure Stock Market Pain: INTRODUCING “DRAWDOWN”
Have you ever had a “painful” experience in the stock market? Perhaps you owned tech stocks at the dawn of the new millennium. As The Impact of Losses chart at the right shows, the tech-heavy NASDAQ fell 78% in 2000-02. Or maybe you held stocks during the Great Recession of 2007-09, when the S&P 500 fell 57% from peak to trough.
The chart below shows the drawdowns of the S&P 500 for the last 50 years.
We call these big pain points “drawdowns”. A drawdown measures the largest loss, from high to low. It’s easy to calculate. Let’s say your account showed a high value of $2.0 million on your November 2007 statement. In February of 2009, your statement showed the account was then worth only $1.0 million. That’s a 50% drawdown.
Stocks can be good*
*except in down markets
I have such a plan. Your exposure to stocks is adjusted as market conditions dictate: Just data, no emotions. It’s a plan designed for millionaires who don’t want to become thousandaires — financially successful folks like you who enjoy their current lifestyle and want to keep it.
Measuring the drawdown is only the beginning. You then want to calculate what it would take to recoup your losses after such a drawdown. In the example above where the account dropped from $2.0 million to $1.0 million, we need to know what it would take to get back to the $2.0 million level. That’s simple – it would take a $1.0 million gain. From a starting value (after the drawdown) of $1.0 million, that translates into needing a “gain percent” of 100%.
My family and I have been in the neighborhood for over 30 years. My office has been at the corner of Westlake & Thousand Oaks boulevards for ages — we’re just down the block.
The “Impact of Losses” chart shows what it takes to recoup from various sized losses.
Of course – everyone knows that. But if this is such common knowledge, how many investors (or their advisors) have a plan that seeks to lower stock exposure during down markets?
Robert A. "Rocky" Mills is a registered representative with and securities offered through LPLLet’s Financial, Member FINRA/SIPC. Investment advice Let’s talk. make sure you have a plan. offered through Westlake Investment Advisors, a registered investment advisor and separate entity from LPL Financial.
Robert A. “Rocky” Mills
Vice general President information only and are The opinions voiced in this material Senior are for Financial Advisor not intended to provide specific advice or recommendations for any individual. Portfolio Management Director All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and mayMorgan not beStanley invested into directly. Investing 100 North Westlake Boulevard, Suite 200 involves risks, including loss of principal. Westlake Village, CA 91362 805-374-8118 [email protected] www.morganstanleyFA.com/rocky.mills
The strategiesand/or investments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. ©2015 Morgan Stanley Smith Barney LLC. Member SIPC CRC 1149798 3/15
What becomes apparent is that the “Gain Percent” rises exponentially as the “Loss Percent” increases. Bottom line: you need a system in place to avoid large losses. You can likely recover from small losses, but large losses are what really thwart long-term growth. Robert A. “Rocky” Mills is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Westlake Village. The information contained in this article is not a solicitation. Investing involves risks. The views expressed herein may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.
